I am slowly positioning my largest (but by no means only) SIPP towards investment trusts.
Why? You can read the full reasoning in my previous articles that:
- Put forward investment trusts as one solution for retirement income.
- Made the case for active management in deaccumulation.
- Explained the traits I look for in such trusts.
Basically it boils down to a combination of in-built diversification, (mostly) reasonable charges, and a proven investment model that in many cases goes back over a hundred years.
That said, investment trusts differ widely in their suitability for income-focused retirees.
Fitness for purpose
Take, for instance, Scottish Mortgage. While I’m a huge admirer of Scottish Mortgage (and a holder, in another portfolio), its miserly yield is of little use once an investor moves from a strategy of accumulation to one of deaccumulation.
Likewise, as with index trackers and investment funds in general, costs are everything. Why pay virtually double, for a more or less identical performance? For the unwary, it’s easily possible.
Which is why, this time last year, I published a table of retiree-focused data on a selection of investment trusts.
And now, I’ve updated it.
Yearly review
One year on, not much has happened – which is exactly as it should be in the (mostly) slow and steady world of investment trusts.
Click to see the full-sized investment trusts for retirees table
There are however some points worth making about a few of these trusts. (In the discussion that follows I’ve marked with an asterisk those I personally hold).
- Yields are up, right across the board. No surprise there, what with the FTSE 100 down some 800 points since May 2015, having hit an all-time high of 7104 on April 27th, just days before. Generalist trust Murray Income* now offers a yield of 4.78%, for instance, while Asian specialist Aberdeen Asian Income* yields 5.07%.
- Some trusts that I judge of interest to income-seeking retirees have reduced their charges – most notably the two Invesco trusts managed by Mark Barnett, after Neil Woodford decamped to run his own outfit.
- Two contrarian trusts led by well-established, highly-regarded managers (Temple Bar* and Murray International*) are now characterised by a discount, not a premium. Temple Bar, for instance, has a 12-month average discount of 5.07%.
- Costs remain a differentiator. Schroder Income Growth has this year increased its ongoing charge from 0.94% to 1.00%. But six of its top ten holdings are the same as the lowest-charging investment trust in the selection – the much-admired Job Curtis managed City of London* – where charges have been reduced from 0.44% to 0.42%.
Personal account
Finally, how has my own SIPP performed over the period?
The capital is down in line with the market, as you would expect. But income has risen by an appreciable amount, and has been reinvested in further purchases of investment trust shares.
Gradually, the proportion represented by trackers, ETFs, and direct shareholdings is reducing, and the proportion represented by income-centric investment trusts is increasing.
On retirement – still slated for nine years away, when I’m 70 – I shall simply switch the income from reinvestment to funding the cost of living.
Note: As mentioned, while not in any sense a recommendation, Greybeard’s own holdings among the investment trusts are indicated by an asterisk. You might want to read the rest of his posts about deaccumulation and retirement.
Comments on this entry are closed.
Great stuff TG : to be able to live off the ‘natural yield’ of a portfolio in retirement!
Are you in a position yet to indicate :-
Geographical Regions weightings?
Fixed Income weighting?
As Income Seeking retirees we favour some exposure to :-
Infrastructure (HICL/3IN)
Private Equity (FPEO)
Thanks for the heads-up on the charges for SCF v CTY. As there is so very little to separate them on performance (unsurprising if as you say, essentially same stocks held), we may well consolidate SCF into CTY when premium/discounts line up. There seems effectively zero diversification benefit holding both!
Thanks again.
If its not too personal a question, how many SIPPs and which brokers?
I like the idea of owning a slug of ITs in a SIPP, so thanks for the articles
Great article, thanks TG!
Won’t you miss the fun of actively managing your investments? I’ve recently left work in early 50s to live on the natural income from my investments (although not needed to draw any income yet) and to be honest one of the big reasons to leave work was to spend more time researching further investments, something I rather enjoy. I’d not want to give that fun away to a third party fund manager.
All the best,
Ric
Hi Ric,
We left work in 1992 aged 49/45 and started out very much as yourself analysing and investing in companies world-wide. That really was a job and a half, particularly keeping up to date with the news flow. Like you and TI we loved it. TD Waterhouse (then) was a godsend for overseas co’s, handling the currency ond other issues.
Very drawn to John Neff’s style of investing to assess when any company was cheap or dear.
The day came when the penny dropped, that with a few exceptions, co’s were cheap/fair/expensive mostly at the same time! So why were we bothering with this heavy work-load, scanning 100s of companies for potential investments, etc!
Our attention then increasingly turned (mid to late 90s) to overall market valuations when allocating between Stocks/Bonds/Real Estate/Cash. That change has paid off handsomely! The legwork is now carried out by tracker funds and Investment Trusts. We simply concentrate on the Asset Class Allocation decision, the most important decision of all.
By all means keep up with and enjoy individual stock selection, but keep a wary eye open on Asset Class Valuations overall. Whether you are in Tesco, Next, Rotork, Statoil, P&G, ARM, Microsoft, Tesla, or other, will matter not one jot when stocks as a whole rampage or crash! While valuations do not predict market direction, they do give the investor some idea of long-term expected returns and downside risk. That is invaluable.
Good Luck
First post – please go easy on me. When it comes to generating income from either a IT or Unit Trust, does it actually matter if you take the income or simply sell off small chunks of capital equal to the same value? I know there could be a reinvestment cost for income units in a unit trust etc, but at a high level, does it make any difference if you draw off “income” or increased capital value?
I get the emotional appeal of only drawing the natural yield and leaving capital intact, but if an investor just withdrew capital back down to the fund value at (say) twelve months ago, do you achieve the same ends?
Apologies if this question is old ground, but ive not spotted an answer to it.
@SurreyBoy — It’s been discussed quite a bit, though mainly in the comments. In theory you’re quite correct. In practice, I would suggest “the emotional appeal” is not to be discounted.
It’s one thing to be very rigorously logical and selecting passives when you’re in your 30s, say, contributing £500 a month to a £20,000 portfolio and understanding that over the long-term index funds are very likely to give you the best chance of the highest returns, due to their lower costs and superior returns versus active funds.
It is a different kettle of fish I’d suggest to be de-accumulating perhaps £500,000 or £1,000,000 or more, and with a passive total return based strategy that requires you to go in and sell chunks of your portfolio down — perhaps in a bear market market where you’ve already seen your shares fall 20-30% — and this after a lifetime of *saving* and being used to getting through bear markets by at least consoling yourself you’re buying shares on the cheap. Now you’re always a seller…
That said there are very many who do advocate your approach (modified to produce a target income, rather than optimistically always ‘harvesting’ the excess gains to the year ago level — there aren’t always gains! 😉 ).
It is the standard method in the US, which does not have our long history of great performing income investment trusts. It’s a theoretically equivalent decision pursue income or capital gains, after taxes and costs (there’s a theorem on this) though you can find plenty of periods/markets where it didn’t hold etc.
Perhaps most importantly, living off natural income alone isn’t an option for most people, who won’t have enough money in their retirement pot to avoid selling down their capital.
But there’s also the question of mental ability in old age, which is a big reason The Greybeard follows this approach. As he wrote on a post on the subject:
http://monevator.com/death-infirmity-investing/
I think that’s the sort of humble way to approach these subjects without a ‘right’ answer, although in reality you will hear many vehement voices in the discussion. Ultimately I think it’s a matter of personal choice, and there’s no “definitely correct” answer.
Hope this helps!
Hi Greybeard
Great article
I gave up analysing companies,mutual funds and investment trusts sometime ago
Very time consuming,expensive to hold and never really did any better than a tracker.
Reduced funds to aTotal World Stockmarket Tracker and aTotal World Bond Tracker
70% Bonds 30% Equities because I have enough and I am 70
Sell chunks of Bonds or Equities as required depending on the current state of my Asset Allocation
Currently only takes 0.18 Basis points to run the whole thing-Sipps and Isas
Plenty of time to do other things and sleep well at night!
Been through a few ups and downs with this arrangement-note my age-and it seems to work
Just my penny,s worth
xxd09
Thanks for the comments, guys. The Investor has answered for me, and extremely fully, too. It’s possible to play all sorts of tunes, I’m sure, and there certainly isn’t a single answer that’s right for everyone, but ITs seem a pragmatic approach for both my circumstances and those of many others.
But “pragmatic” isn’t the same as “lowest cost”, I’m well aware.
Good article. I can well understand the reasons why you are doing this. Sometimes as you say it’s not just about cost and getting the cheapest possible but also being pragmatic.
Thanks for the information.
So, when de-accumulating, it is advised to hold a wedge of cash to avoid having to sell when markets are down.
Problem is, how do you know markets are ‘down’? Are they down now (compared to May 2015) and I should be using some of the cash? Have they been down since 2000? Should I be selling US holdings when US is up relative to UK due to stronge dollar?
@K: use the CAPE or Q methods to assess whether stock markets are high or low. Whether there’s any useful data outside the US and UK I don’t know. You will still be faced with the problem if markets stay high or low for decades.
@K — Be careful with CAPE or Tobin’s Q. There’s a lot of controversy about valuation, and no easy answers.
E.g. See this, just from this weekend’s links:
http://dashofinsight.com/market-cheap-three-things-need-know-valuation-dont/
In general with those cash buffer / sell down methodologies you sell regardless of the market level — because you don’t have a choice, sooner or later — having a cash buffer is mainly to smooth things (I am generalizing hugely, that one sentence doesn’t sum up the entire investment method and is definitely not advice!) The market can go down and stay down for years.
This issue is exactly the sort of reason why I intend going down the living-off-income route, but I know others feel differently / don’t have the option.
You’d probably be better off asking the question on a non-income drawdown thread. For instance my co-blogger just recently shared some thoughts here:
http://monevator.com/vanguard-target-retirement-funds/#comment-756686
He intends using the total return / sell down method in retirement. 🙂
Hi Investor
Take your point re Deaccumulation phase and the Market going up and down and possibly affecting Withdrawals/Withdrawal Rate
Surely the large proportion of Bonds normally held in a Retirement Portfolio provide the Stability required.
Probability will be that bulk of Withdrawals during Retirement phase will be from the Bond Allocation of the Portfolio but will also be from Equity Allocation of Retirement Portfolio if Market rises.
My experience so far over the last decade -admittedly with a low Withdrawal Rate-2 to 3% is that bulk of withdrawals have been from the Equity Allocation side of Portfolio
Have the last 10 years been good years -not to be repeated-who knows?
xxd09
@K
Call me old fashioned but Dividend Yield (DY) which can be conservatively reckoned a real yield, has a lot going for it as a measure of valuations in stocks and other asset classes. The proponents of CAPE, q, PE1, have to make a series of justifications as to why the measure may be temporarily flawed and need adjustment at any particular point in time.
DY is allegedly a broken measure (Smithers) but if adjustments are made simply from decade to decade it can bring some insights. If we assume a median for the UK market of 4% and for the (buyback affected) US market of 2.4%, then the UK market is presently about 5% above median, and the US market about 10% above median.
There are dangers in this perhaps over-simplistic method with uncovered dividends, etc, but it does in addition to an absolute measure provide a means of comparing stocks with the real yields of competing asset classes.
There is another way of looking at the problem in the comments above about when to sell stocks rather than fixed income in retirement.
Stocks it has been said, are in one of the following conditions one third of the time. This allows the investor to draw up a sensible plan :-
1. Hitting All Time Highs
2. Making New Lows
3. Recovering
On the wider issue of retrement investment strategies, grislybear and the writer in the next dated thread have been discussing the Frank Armstrong approach.
If assets are to be drawn-down in retirement, then Frank in ‘The Informed Investor’ suggests a beguilingly simple two bucket approach.
Bucket 1 : 5 years (better 7 years) of income needs in cash and/or short term bonds.
Bucket 2 : Global Stocks
Extracts from Frank Armstrong’s new on-line book ‘Investment Strategies for the 21st Century’ at ‘investorsolutions.com’.
“I assumed that the investor would re-balance the portfolio so that in good years he would replenish his hoard of short-term bonds, and in bad years he would draw it down. This idea isn’t entirely new. A similar technique was used by Pharaoh about 3,000 years ago with some notable success.”
“This above is not the only possible exit strategy. If you are fortunate enough to be very well off, you might consider withdrawing only your stock dividends. Dividends tend to be very resistant to decreases in bad times. Most companies are very reluctant to declare a dividend unless they can continue it through thick and thin. Cutting a dividend sends a very negative and embarrassing message to the world at large. Companies hate to do it.
So, a diversified portfolio of dividend-paying equity stocks has a remarkably stable income potential. This income is far more stable than income from either CDs or bonds and usually shows good increases over time. Of course, dividends are usually less than bond yields, at least to start. And, capital value will fluctuate more than either CDs or bonds.
America’s old line blue bloods have done very well by living off dividends, and letting the capital ride. Dividend stocks usually have a high book-to-market ratio (value), and as a class perform quite nicely compared to growth stocks. That is to say that dividend stocks have high total return for the level of volatility you must endure. Because you are going to spend the income anyway, income taxes should not be a particular concern. You can let the capital gains run free if you don’t sell your portfolio and you will never have to pay a capital-gains tax. Your heirs will receive a step up in basis at your death, so they won’t have to pay a capital-gains tax either.”
UNQUOTE
So seemingly we should be dividing retirement investment strategies into two classes :-
1. Be wealthy enough as The Greybeard hopes to be, and live off the natural yield.
2.. If obliged to use capital draw-down, maybe then think about Frank’s suggestion as a starting point?
Very interesting & thought provoking article and subsequent commentary/opinions. Thank you!
Allowed me to revalidate arguments underpinning my own retirement plan which is pay off mortgage as a matter of priority and then (agree with TA entirely!) drawdown from total returns. This at the moment plan is annual “salary” upfront to have ready access to funds.
Salary = (bread & butter living expenses + 100% of that for LIVING Life as opposed to just existing).
Have I got enough to support that plan? Worried about that for a few years and now think who knows? If it’s not enough then it’s definitely too late to do anything significant to increase the pot now. No use buying a Lottery ticket – I am one of those that has never won anything in my life 😉
Method in that madness: at that stage in my life:
1) don’t want to be second guessing the markets at any level (i.e. sectors or geographical regions) so decided to stick to my investment strategy till the end which is PASSIVE & DIVERSIFIED.
2) it’s retirement fund in its totality – accumulated through decades of hard graft – and don’t particularly want to care whether the drawdown is from income or capital buckets.
Saying that entirely agree with TG – at end of the day it’s about perception of risk and individual appetite for that risk. Ultimately all plans inherently have risks attached however many safeguards we put around it.
The doubts about the Constant Ratio Formula Plan in retirement, is that in spite of all the detailed analysis and projections by the distinguished luminaries (Kitces, Pfau, etc in the more recent papers), we really haven’t a clue how the sequence of returns is going to hit us in retirement!
There is a failure rate, and that failure could be us!
We could end up incredibly rich, or as they are fond of saying on the other side of the pond “eating cat food”.
So yes total return is the objective for all of us.
The difficulty is how we get there in an unknown future. It was interesting to note the construction and the evolving historic changes outlined in similar funds by The Accumulator in his article on Vanguard Target Retirement Funds. As I recall for the present day retiree, about half today was in Global Bonds (GBP hedged). Now that if my memory is correct?, and it very often isn’t, that really is conservative and playing for safety!
Again Frank Armstrong has this to say :-
“Investing during retirement is completely different than investing for retirement. The requirement to generate liberal, consistent, and reliable income over a long-term, indefinite time horizon changes the problem in a fundamental way. During the accumulation phase it is completely rational and consistent to take a full measure of global equity risk in return for probable higher returns. The emphasis is correctly placed on attaining the highest possible accumulation. At retirement the objectives change : Generate income, and don’t run out of money. An entirely different strategy is called for.”
UNQUOTE
So as amateurs and if in doubt, maybe we should keep an eye open on the changes that the Vanguard Target Retirement Funds are making for our own age group and shadow?
Thanks for replies. Will take some more thinking.
A specific question: what happens to a dividend ‘fund’ – let’s say an IT like CTY – when interest rates go up? Or when inflation kicks in? How about ITs and funds that are less income focussed, but still provide an income (say 2-3% yields today)?
I think I know what happens with bonds, and ‘bond-like-equities’ but hazier with other equity based assets.
@Kraggash
What happens to the dividend income? In real terms, not much, if anything. In nominal terms there may be an illusory increase from both interest rates and inflation rising. What happens to capital? I’m not really concerned — it’s the income that I want.
@Greybeard
Understood, but I have lingering feeling that it would be better to move into e.g. CTY (and bonds) when/if the interest rates are at a (historically) more normal level.
What is the easiest way to get reliable figures for current premiums/discounts for some of these trusts? Different sites seem to give different figures, some of which are plainly ridiculous, such as the 12m average Premium/Discount for TMPL shown as -38.65% on HL:
http://www.hl.co.uk/shares/shares-search-results/t/temple-bar-investment-trust-ord-25p-share
I’ve just clicked on arty’s HL link, and it shows the 12m average discount for TMPL at 7.33%
Indeed it does, although it didn’t when arty posted it. I checked.
OK – I think I’ve just read the complete back catalogue of greybeard articles now to get myself back up to speed on the IT side of things.
I’ve heard the ‘basket of ITs’ mentioned, but I’m not sure I’ve seen how you actually implement such a basket.
I.e. how do you go from the information in the IT table in the article above to a set of ITs sitting in your portfolio?
Questions outstanding in my mind are things like:
How many ITs do you need for sensible diversification (7 seems to be a much touted no. on the interwebs)?
How do you select that band of 7 (or however many)?
Once purchased is the idea to forget about them, or do you have to watch out for things going wrong and take corrective action?
This stuff may have been covered and I’ve just missed it, but if not, I think its the missing link between the concept and the implementation..
@The Rhino: “This stuff”, as you put it, hasn’t actually been covered. Frankly, I think it’s for people to take their own views on. I know that my own approach is to focus on those ITs with lower costs (as costs don’t seem to correlate with performance), and to retain a strong UK focus and pound sterling focus, as the UK is where I live, and the pound is the currency I have to use to pay my bills in retirement. That said, I have decent chunks of Asian income trusts, North American income trusts, and European income trusts — it’s that UK-focused ITs form the larger part. Even so, of course, you look at a trust like CTY or MUT and you see heavy holdings of the usual international suspects — Shell, Glaxo, BAT, Unilever, etc etc. But really, I think that it’s a personal view.
hmm – thats a problem then, the gap between the table and ‘pulling the trigger’ as it were
I remember several TA articles on how to ‘pull the trigger’ on a passive portfolio, in practice, its a significant thing that can be a major hurdle to get over,
From my perspective, as someone who feels they’ve got a handle on passive investing over a period of say, a decade or so, and has put together a passive portfolio over that timeframe – That knowledge doesn’t seem to translate to picking ITs.
I like the idea of a dependable income stream, I can see that ITs provide a means to do this – but as for an actionable strategy to actually buy some, well I’m all at sea there, absolutely no idea how to go about it..
In other words, I’d say someone whos never bought an IT probably needs their hand holding for the first few forays..
I remember being in the same boat several years ago with index funds and that seminal monevator post on a dozen or so different portfolios, i.e. permanent, marcowitz, coffee-shop, swedroe etc. was the initial flash of the torch to show the way on how it could be done i.e. the link between the theory and the practice – in other words advice not so much on the ‘why’ but the ‘how’
Just to flesh the idea out with another example
There was the monevator idea of the ‘absolute beginner’ portfolio of a ftse all share tracker and cash, 50/50 split just to get the ball rolling, then you refined by tweaking the 50/50 depending on your timeline, then you refined by switching out some cash for bonds, then you refined by moving from ftse all share to a bit more global..
i.e. baby-steps to get you going
could a similar approach be applied to getting into ITs?
@The Rhino — I hear what you’re saying and I think we could do something in that direction, but not to the extent you’re probably envisaging. I mean we could give a few example portfolios, but they would not be the *equivalent* of the example passive model portfolios. They would be very subjective, chosen by the author, and would likely deviate from any benchmark (up or down).
Ultimately buying investment trusts is stock picking companies (who happen to buy shares). So one needs to don an active investing hat, and dig in oneself really.
Let’s see what the passive income portfolio’s Greybeard comes up with in the next round look like, also. 🙂
I look forward to it..
Possibly a bit of crowd-sourcing could also be helpful. If any readers have already put together a basket they could list the constituent ITs, the % allocated to those ITs and ideally a short summary of the process they used to weave it?
That would be be incredibly useful.
@ The Rhino
I found a forum discussion about getting a reliable income stream from ITs on the ‘Lemon Fool’ website extremely useful.
You can find it if you google ‘Gadge Global Income Portfolio’ (sorry, I don’t seem to be able to post the link directly here).
@dlp – had a look at that stuff, just what i was after
looks like you can’t just buy one or two ITs like you can with trackers and be confident that all is well.
Min 7 by the look of it. I think it would be pretty easy to come up with such a list if you just based it on one of those threads by luni or gadge.
On the allocation side it looks like you just go equal weighting or thereabouts for the various ITs in your basket
I think if your going to depart from a pure passive/tracker approach then basket of ITs is prob more sensible than trying to create a HYP. No-one seems to have had much luck with the HYP approach. ITs sound simpler
I’m hoping that a similar thread crops up here against one of the relevant articles, i.e. discussion on what a basket of ITs could look like – various peoples take on which ones to choose and the % allocated to each
If that occured I reckon you could quickly get an idea of what would be a roughly sensible set of purchases..
@The Rhino: the background to the Lemon Fool posts is a long-running IT selection popularised by a poster on the (now defunct) Motley Fool discussion boards. The “basket of 7” were slow and steady ITs, picked for long-term income AND growth prospects. The “basket of 8” offered a higher starting income, but less growth in both income and capital. These were (supposedly) the best UK-focused equity income trusts around.
@GB are you going to comment on what your basket consists of?
who the hell came up with the term ‘basket’?
a basket of trackers? I don’t recall anyone ever saying that, but a basket of ITs.. they’re everywhere
its like a gaggle of geese
hang on, i’ve just seen some mention of asterisks – but you haven’t marked up the table as such though I don’t think, either that or you’ve bought everything in the table judging by the last column 😉 – and theres no allocation % either right?
Bear in mind that my own situation is a work in progress, and that the SIPP in question still contains a few individual shares, and some tracker ETFs. But the greater part of it is ITs, so far distributed between AAIF, BRCI, BRNA, JETI, MUT, MYI, TMPL, CTY, NAIT. This is *not* advice, or a recommendation for you to do the same.
@ The Rhino: The table is *NOT* a portfolio. It is a list that investors can use to compare ITs and make selections.
@GB – thanks for the ‘basket-o-nine’, a good ‘starter-for-ten’ as it were; and out of the many IT related confusions I’m currently enjoying, perceiving your table as a suggested portfolio wasn’t one of them. If you are asterisking ITs in the text of the article that you possess I would say you may as well make that obvious in the table too though..
an alternative could be to sort the table on desirability
I have mentioned it before, but it is still not clear in my mind, What happens if/when inflation kicks in if you are living of IT income? Presumably, to some degree, the higher income ones will act as a ‘bond proxy’ and go to a higher discount thus making the yield higher. You may not worry about the the value of the holding falling, but the income from your investment is static, rather than increasing as needed.
Now, for UK inflation, I assume NAV of UK ITs will increase as well, so is that ‘inbuilt’ inflation protection? What happens with non-UK ITs?
What happens when global inflation is higher than UK?
Is inflation/deflation something you can ignore in this case, or does it need a strategy?
@The Greybeard – I’ve recently read a number of your blogs on IT and deaccumulation. I’m really interested in the idea of a portfolio of income generating Investment Trusts to fund my imminent retirement. I’m also keen to structure or follow model portfolio’s which are regularly monitored and managed. I recently discovered the John Baron IT portfolios which he positions as Spring, Summer, Autumn and Winter depending on what stage of life you are at.
I’m very impressed with JB and in particular his Winter Portfolio as it focuses on generating an income (with some growth).
I wondered if you were familiar with JB as an IT specialist and what your thoughts were on his portfolio’s – particularly the Winter portfolio (I recently posted this on a different thread somewhere on this site).